U.S. Markets closed

Qualcomm Joins Fray in Data Center Chip: Should Rivals Worry?

Supriyo Bose
MercadoLibre (MELI) is likely to benefit from strengthening online-to-offline offerings, payment initiatives and robust shipment services in the first-quarter 2019.

Qualcomm Incorporated QCOM, a household name that is synonymous with smartphone chips, has decided to throw its hat in the ring for data center chips. Leveraging its mobile expertise, Qualcomm intends to replicate its success story within the data center chip market by offering AI-powered chips that form the fundamental building blocks of cloud computing.

What Inspired the Strategic Plunge?

Over the past few quarters, Qualcomm has been witnessing dwindling sales due to lackluster demand trends in the smartphone market and continued legal battles with Apple Inc. AAPL, which put its technology licensing business in jeopardy. Although the global smartphone market is expected to see muted growth over the next three to four years, major portion of this is likely to come from the low-cost emerging markets, weighing on Qualcomm’s margins. Moreover, the company has been facing stiff challenges from low-cost chip manufacturers like MediaTek and Rockchip as well as handset manufacturers’ SoC (System on Chip) projects such as Exynos by Samsung.

In addition, there appears to be a huge demand-supply imbalance as semiconductor firms jostle to either optimize the traditional products on offer or develop new solutions altogether to meet the burgeoning data requirements of cloud computing firms like Alphabet Inc. GOOGL, Facebook, Inc. FB and Amazon.com, Inc. AMZN. The need for high-power AI-driven data center chips have surged exponentially as firms like Facebook reportedly makes 200 trillion predictions daily, making it unsustainable to cater to such demands with existing pool of products.

It seems that the strategic decision to tap a new market segment, which is likely to swell to $17 billion by 2025, was largely driven by an innate desire to reverse the downtrend in business and capitalize on a huge revenue-generating potential.

Game On?

The rival firms have also taken a note of such gold mines and are geared up to take the bull by the horns. Intel Corporation INTC, Qualcomm’s nemesis in its fight against Apple, has taken recourse to inorganic growth strategies to gobble up smaller frays in the market to come up with different types of chips. In addition, it is ramping up the capabilities of its existing products to better handle the deluge of data.

NVIDIA Corporation NVDA, another competitor of Qualcomm, has fortified its graphics chips for data center use by investing significantly in the business. The company expects High Performance Computing and data centers to witness tremendous growth opportunities over the long run. NVIDIA intends to focus on new growth catalysts for its data center business, such as inference, data science and machine learning techniques to strengthen its presence in this niche market.

Moving Forward

Although Qualcomm is yet to provide the finer details of the upcoming product dubbed the Cloud A1, it has apparently ruffled the feathers of the industry players with proposed features of 50x more powerful in processing AI workloads as its flagship mobile chip. The chip is likely to be instrumental for facilitating inferencing work that helps to make informed decisions based on analysis of data streams such as digitized voice or images.

Whether Qualcomm can indeed benefit from such a revolutionary product remains to be seen. For the time being, we can safely assume that it has created a ripple in the market, with rival firms probably noting the entry of the industry veteran with apprehension.

Zacks' Top 10 Stocks for 2019

In addition to the stocks discussed above, would you like to know about our 10 finest buy-and-holds for the year?

Who wouldn't? Our annual Top 10s have beaten the market with amazing regularity. In 2018, while the market dropped -5.2%, the portfolio scored well into double-digits overall with individual stocks rising as high as +61.5%. And from 2012-2017, while the market boomed +126.3, Zacks' Top 10s reached an even more sensational +181.9%.

See Latest Stocks Today >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Amazon.com, Inc. (AMZN) : Free Stock Analysis Report
Facebook, Inc. (FB) : Free Stock Analysis Report
Alphabet Inc. (GOOGL) : Free Stock Analysis Report
QUALCOMM Incorporated (QCOM) : Free Stock Analysis Report
Apple Inc. (AAPL) : Free Stock Analysis Report
NVIDIA Corporation (NVDA) : Free Stock Analysis Report
Intel Corporation (INTC) : Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research